“The Rise of Device Benefit Management” and their use by insurance companies to drive down the cost of implantable medical devices.
Charles Darwin once said “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” Things are changing in the arena of contracting for implantable medical devices (IMDs), and the ones evolving rapidly appear to be insurers. This article notes what several large insurance companies in the United States are beginning to do with direct contracting for physician preference IMDs.
Currently, most hospitals buy the majority of their medical supplies through participation in a group purchasing organization (GPOs). This covers a wide range of products, but historically, clinical preference IMDs are not purchased through GPOs. Usually, hospitals directly contract for these devices with manufacturers. As a part of the contacting, some manufacturers are requiring “confidentiality clauses” with hospitals so they cannot share information about pricing. There are a number of reasons given for this, but mostly because many large implantable device manufacturers do not contract with GPOs. Nor is it in their economic interest to do so. Instead, their sales and marketing strategy is to go directly to the doctors who will influence the hospital choices. Not surprisingly, in the United States, it is these devices which are the highest cost and contribute to the higher costs of the related procedures (i.e. hips, knees, cardiac rhythm devices, etc.).
Some of the nation’s largest private health insurance companies are now contracting with third party companies to negotiate with manufacturers for better pricing on the related medical device products. These companies are generally referred to as Device Benefit Management (DBM). The model for these third party companies includes actually owning the contract with the manufacturer, and in some instances, taking title to the medical device – which is sometimes bought in bulk.
The two major DBMs in this space competing for the insurers business appear to be IPG Surgical, Alpharetta, Ga. and Access Mediquip, Lake Mary, Fla.
According to Forbes Magazine, IPG Surgical was founded in 2004. Among other consulting services, they buy medical implantable devices, provide them to hospitals, and collect reimbursement from insurance carriers directly. Forbes reports many participating hospitals like this arrangement “because they reduce cash outlays on inventory and avoid dealing with insurance carriers” and they tend to “reimburse IPG at a lower rate than what hospitals are paid. IPG makes money by purchasing implants in bulk (at lower prices) and selling them to carriers at a markup.” The company raised $35 million from Sequoia Capital in March 2010.
According to the website for Access Mediquip, “Through our flexible Implant Management Platform we deliver services that begin with preauthorization support and continue through billing and reimbursement. Our solutions, powered by a robust technology platform, enable our partners to meet their business goals while providing patients access to the most effective implant technologies.”
During an American Health Insurance Plans conference in 2012, IPG Surgical President/CEO Jay Ethridge discussed his company’s market opportunity for implant device spend and health plan prioritization and challenges. He noted in his comments that the IPG model was very timely after the Supreme Court ruling on the Affordable Care Act. “With affordable and quality care as the top priority, and the critical need to reduce healthcare costs, there is an imperative need for greater transparency in the U.S. health system,” he said. “IPG is playing a very important role in the changing healthcare landscape as unprecedented innovation around care coordination models is leading to new partnerships between health plans and providers … As health plans seek initiatives to address high markups, growing utilization and quality programs to deliver measurable cost reductions, it is exciting to share IPG’s Device Benefit Management solutions.”
According to one senior health insurer executive who spoke on background for this article, Aetna, United, and Cigna have all moved forward with multi-year arrangements with DBMs. No mention was made about Wellpoint and the Blues, but the source did say “It is easy to speculate that they will likely consider DBMs in the near future.” As to the post Supreme Court ruling on ACA, both IPG Surgical and Access Mediquip seem to have found a sweet spot with delivering solutions that integrate within Accountable Care Organizations (ACOs), bundled payment initiatives, and varying reimbursement structures.
According to Matt Houston in a March 4, 2013 GHX Health Hub opinion piece entitled Preparing for Healthcare Reform; The Need for Mutual Understanding “Provider organizations are expressing a sense of frustration that their suppliers don’t fully understand the impacts of healthcare reform on their operational and financial performance. It’s a two way street. Supplier organizations too are feeling the pressure and voice the challenges they face from the expectations that they come down on price or make other accommodations but still deliver the same level of product quality and customer service.”
GPOs are not sitting idly by and appear to be seeking legislative relief from the “confidentiality clauses” on pricing information, which manufacturers have successfully negotiated with individual hospitals and systems. According to a 2008 Health Affairs article by Jeffrey Lerner et al., “The secrecy that certain manufacturers demand, which affects nearly 60 percent of the nearly $112 billion cost of all medical devices, may be augmenting manufacturers’ profitability … the industry’s returns to shareholders were twice those of the pharmaceutical industry in 2007.” Many GPOs are supportive of legislation initially introduced in 2007, by U.S. Senator Charles Grassley (R-IA) mandating transparency in the prices of implantable medical devices that “surgeons choose, hospitals purchase, patients receive, and the public pays for.” In his introductory comments, Grassley noted “Hospitals have no way of knowing what a fair market price for a medical device is because in this one industry there is a veil of secrecy over pricing information.” As a result, hospitals “are involved in one-sided negotiations with medical device manufacturers. … Many hospitals pay absurdly more than others for the same medical device.”
A January 2012 study by the U.S. General Accounting Office (GAO) buttresses the arguments of GPOs and Senator Grassley for more transparency in IMD pricing. The GAO states “From 2004 through 2009, expenditures for hospital IMD procedures increased from $16.1 billion to $19.8 billion, an increase of 4.3 percent per year – a rate equal to that of Medicare spending for other hospital procedures. While cardiac and orthopedic procedures accounted for nearly all IMD-related expenditures, orthopedic procedures accounted for most of the increase in such expenditures during this period. Utilization increased at a faster rate for orthopedic devices and accounted for the majority of changes in expenditures for IMD procedures during the period.” Wide IMD price variation exists for implantable cardiac devices as well. As an example, noted in the 2012 GAO study of 31 hospitals, “… the difference between the lowest and highest price hospitals reported paying for a particular automated implantable cardioverter defibrillator (AICD) model was $6,844. The difference between the highest and lowest price reported for another AICD model was $8,723. The price differences for the remaining two AICD models in our study fell in between $6,844 and $8,723. The median prices across the four AICD models ranged from $16,445 to $19,007.”
What did GAO highlight as the driving force for this price disparity? They noted “the influence of physicians on hospitals’ IMD purchasing. Although physicians are not involved in price negotiations, they often express strong preferences for certain manufacturers and models of IMDs. To the extent that physicians in the same hospital have different preferences for IMDs, it may be difficult for the hospital to obtain volume discounts from particular manufacturers. Also, confidentiality clauses barring hospitals from sharing price information make it difficult to inform physicians about device costs and thereby influence their preferences.” The GAO study added “Other factors that influence IMD prices include the degree of seller competition and a hospital’s market share.”
According to the 2008 Health Affairs article “Medicare and the taxpayers who finance it have a huge stake in paying the lowest possible prices consistent with appropriate quality. Medtronic, a major manufacturer of implantable cardiac devices (ICDs), projected early in this decade that 23,410 ICDs would be implanted in 2004, rising to 46,820 by 2006. But (Medicare) actually paid for 66,103 devices in 2004 and 74,000 devices in 2006.”
A 2008 RAND study appearing in Health Research Highlights, by D. Goldman et al., estimated that “expanding ICD use to half of elderly patients with new cases of heart failure or heart attack would result in 374,000 new procedures by 2015,” with a multibillion-dollar increase in cost. The cost of the device is about 75 percent of the current diagnosis-related group (DRG) payment of $33,000 for the procedure.” The Congressional Budget Office estimate in April 2008 that technology accounts for about half of the increasing cost of health care.
The negotiation war
William “Bill” McIlhargey is a Principal, with WPM Enterprise in Ipswich, Mass. McIlhargey is a respected consultant with particular expertise in the area of IMDs having worked in the orthopedic, neurological and biologic markets. In a recent interview he observed that “…hospitals have been moving to a capitated cost reduction model. This provides a level of access that bypasses standardization arguments between surgeon and hospital. Historically, a surgeon carrying liability for surgery is held accountable for the outcome of the surgical event, with little relief from its rising legal cost. This lack of tort reform is not viewed as a problem in other developed countries, and is one of the direct underpinnings for physician preference.” However, he observed, “More recently, some hospitals are now willing to address the cost of surgical liability through buying surgical practices and creating surgeon employees.”
As to what will happen within the IMD market with the entry of DBMs and their insurance partners, McIlhargey said “the trend is apparent with price erosion. Underneath the Quarterly Calls by manufacturers that are public companies, many in the orthopedic and cardiology space are reporting negative price impact. What you hear is at best “flat pricing” and at worst “1 to 1.5 to 2” negative pricing, which means they are losing the negotiation war.” He reflects this is more a result of market trends than entry of DBMs on insurer’s behalf. However, this approach obviously reflects the impact of consolidating the market, with the resulting access restrictions that are obtained under viable negotiations. The model for in-network and out-of-network activity is well established, and becomes more expensive to surgeons maintaining “physician preference.”
As the GAO concluded in the 2012 study, “… some hospitals have substantially less bargaining power with the small group of companies that manufacture particular IMDs and consequently face challenges in obtaining more favorable prices. The lack of price transparency and the substantial variation in amounts hospitals pay for some IMDs raise questions about whether hospitals are achieving the best prices possible.” This inability of hospitals and GPOs to significantly alter IMD market prices in the post ACA world is driving insurers into the waiting arms of DBMs. Again, what did Darwin say about the one that survives? Oh yeah, “…the one most responsive to change.”
Note: The author wishes to specifically thank Jahwai Lynch, Undergraduate, Columbian College of Arts and Sciences, a Political Science Major, at the George Washington University, for her research contributions to this article.
Robert Betz, Ph.D., is President of Robert Betz Associates, Inc. (RBA), a federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit www.robertbetz.com.